Dec 5-Dec 11: Huge increase in EUR commercials involvement

We saw a very significant spike in the involvement of commercials in the Euro contract. For the most part, the CoT still suggests the Euro contract should remain rotational, as commercials defend the topside with heavy pressure.

Authored by Ivan Delgado, Head of Market Research at Global Prime. This report intends to unveil the directional bias the smart money is supporting based on the latest changes in market positioning by leveraged, non-leveraged, commercials, small and large funds, asset managers, and dealers (unhedged traders). If one wishes to gain further insights into how to read the CoT data I publish every week, read the following report (primer).

Forex Markets: How To Read The Commitment Of Traders Report?

Access a 2018 comparison table: A handy notebook with the most recent changes in positioning in order to assist the author’s weekly analysis.

⚡ QUICK TAKE⚡

We saw a very significant spike in the involvement of commercials in the Euro contract. For the most part, the CoT still suggests the Euro contract should remain rotational, as commercials defend the topside with heavy pressure. The absence of large specs increase on the way down makes me think this is a market still poised to remain rotational in nature. When analyzing the Pound, we saw textbook short dynamics in futures & options. More downside is expected from here on out. Meanwhile, the move lower in the Yen was driven by a removal of liquidity, which makes me think the topside is largely limited, very much in line with the macro bearish picture. The most notable development in the Assie was the absence of commercials even of the down week seen, which makes one wonder why they’d be sidelined unless they expect lower prices to hedge their positions. The Canadian Dollar exhibits marginal changes, with commercials not keen to get involved even as the price kept selling, an analogous picture to what I picked up in the Aussie.

EUR CONTRACT (E6)

We saw the largest increase in EUR open interest since late May this year, mainly driven by a huge spike in commercials activity. The increase in outstanding positions came ahead of the ECB policy meeting. In terms of overall volume, the OBV confirms that the heaviest involvement of trading activity was skewed to the downside. Surprisingly, the push down off 1.14+ towards 1.13 carried no increase in large specs commitment. An analogous picture was seen via lev funds. The increase in short exposure by commercials was the most significant development, ending with over 48k new shorts for a total of 28k vs 33.6k last week. Total asset managers were barely changed after positions long/short jumped by about 3k each.

GBP CONTRACT (B6)

In a week where the Pound fell precipitously on the back of the Brexit vote cancellation through the UK parliament, most of the volume was clearly concentrated to the downside. Open interest increased marginally by over 5k contracts, while most of the volume was clearly concentrated to the downside. Large specs upped their short bets by over 14k new contracts, which is one of the largest weekly increases this year. Lev funds replicated this dynamic, although less aggressively. Commercial longs logically increased their long exposure, even if the % vs total open interest remains only 20%, which allows a lot more room for the Pound to fall without commercials exerting enough pressure to cause a meaningful reversal. Total dealers increased their long-side positions by about 11k contracts as they are now required to hedge additional short interest. The icing on the cake came courtesy of asset managers, increasing shorts by approx 4k shorts.

JPY CONTRACT (J6)

We saw a major reduction in open interest in a week where the Yen found a double top before selling off aggressively. Large spec shorts were absent in the move lower as reflected by the reduction if over 20k shorts. There were no significant changes in commercials to note. Total dealers also saw their longs lightened up by about 15k contracts, while asset managers shorts also reduced their shorts by about 8k contracts.

AUD CONTRACT (A6)

The fall in the Australian Dollar had characteristics of a removal in liquidity judging by the decrease in open interest. By the end of the last COT data made available, the involvement by spec shorts had been cut back by over 7k contracts, Interestingly, commercial longs didn’t take the opportunity to add longs on the drop, which is a development with clear bearish connotations. Total dealers kept reducing their net long exposure in the Aussie, a sign that the supply dynamics are not as strong as they used to. Meanwhile, asset managers jumped back into Aussie shorts after increasing their involvement by over 4k contracts.

CAD CONTRACT (D6)

The down week in the Loonie was characterized by an increase in open interest by over 4k contracts, with the sell-side volume dominating by a small margin. Total specs failed to extend net shorts, with positions closed down after the blockbuster Canadian jobs reports on Friday. Commercial longs saw a very timid response by barely adding any new business despite the overextension to the downside. Total dealer longs increased by over 5k contracts, which is a bearish sign as it indicates greater supply dynamics in the Cad. Meanwhile, asset managers barely budged, providing no clues.

📌 USEFUL COT RESOURCES📌

There are 4 types of reports published by the CFTC. However, there are only two we want to pay attention to, which include 1. The legacy and 2. The traders in financial futures (TIFF), with the proper version including futures and options activity. Find below these resources:

View a table of the latest legacy report:

These reports are broken down by the exchange, with a futures-only report and a combined futures and options report, the latter being the one we want to stick with. It is then unpacked into reportable open interest positions for non-commercial (speculators) and commercial traders (hedgers).

View a table of the latest TIFF report.:

These reports include financial contracts, such as currencies, U.S. Treasury securities, Eurodollars, stocks, VIX and Bloomberg commodity index. These reports have a futures-only report and a combined futures and options report, the latter the one we want to use. The TFF report breaks down the reportable open interest positions into Dealer/Intermediary, Asset Manager/Institutional, Leveraged Funds, and Other Reportables.

Access the historical data:

In this section of the CFTC website, any entity or individual is free to download the historical data accumulated over the years of the different classified CoT reports. This site is very handy in case you want to crunch the numbers and conduct your own backtesting.

Access a 2018 comparison table: A handy notebook with the most recent changes in positioning in order to assist the author’s weekly analysis.

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